City Journal

Guy Sorman

Japan, After March 11

The country, resilient as ever, remains Asias true power.

Spring 2011

The Yomiuri Shimbun/AP Photos

The earthquake that struck Japans Sendai region on March 11 was the most violent in the nations recorded history. The temblor shook the ground for more than two minutes, tilting the earths axis and unleashing an enormous tsunami that drowned thousands in northern Japan and left a path of destruction in its wake. Adding to the calamity, power outages caused cooling pumps to fail at the Fukushima nuclear power plant, risking multiple reactor meltdowns and leading to mass evacuations.

The crisisdescribed by Prime Minister Naoto Kan as his countrys worst in the 65 years since the warhas led some commentators to predict that Japan will never recover. This is an absurd contention, as was already evident in the immediate aftermath of March 11, when the remarkable characteristics of Japanese society shone through. Accustomed to natural disaster, the Japanese people showed little panic even at the peak of the horror. Looting, which one often sees after earthquakes in other societies, was nonexistent. Japan proved itself astonishingly well prepared: the quake itself, it turned out, caused relatively little direct damage to buildings, even in Sendai, thanks to strict construction codes imposed after the 1995 Kobe earthquake, which killed 6,000. Perhaps most striking of all was that the Japanese export machine was so little damaged. Production and delivery of many goods, ranging from computer chips to industrial components, were interrupted for only a matter of hours, though shortages have slowed things down sporadically.

But even before the earthquake, pundits often forgot that Japan remains Asias leading power and most successful society. True, as the press has trumpeted, the Chinese economy has grown larger than Japans and is now the worlds second-largest, after Americas. Yet China has ten times Japans population, which means that per-capita wealth in Japan is still ten times greater. And Chinese economic output is low-tech, completely different from the sophisticated products developed and made by Japanese industries. Ultimately, were not in a race, says Hideki Kato, one of Japans leading economists and president of the Tokyo Foundation, a free-market think tank.

Yet Kato doesnt dismiss Chinas challenge. To have been overcome in 2010, even if those figures dont mean much, has awakened the Japanese, given them a sense of crisis, he says. And crises have energized the Japanese in the past, points out Naoki Inose, a vice governor of Tokyo and a respected historian. Indeed, they have provoked what many Japanese call the countrys two great historical openings. Will the disaster of March 11 and the rise of China together provoke a third?

Japans first opening resulted from U.S. Commodore Matthew Perrys famous incursion into Tokyo Bay in 1853. Until Perrys arrival, Japan had been extremely selective in dealing with the outside world. The only Europeans granted trading rights were the Dutch (because they didnt try to convert the locals to Christianity); they could trade in Nagasaki, beginning in the seventeenth century, though only for goods chosen by the Japanese government. Among the things they brought were books, from which Japanese elites learned about the West. This was sufficient to keep Japan from being fully isolated or backward, and the few foreigners who visited marveled at the quality of daily life, the bustling commerce and travel, the flourishing music and theater, and the safety and cleanliness of the well-ordered cities. But after Perry arrived and demanded American trading rights, the country became far more open, trading freely with the world and allowing Westerners to live in Japan, mostly in Yokohama.

Perrys arrival also showed Japan that it faced two paths: to suffer Western colonization, as China had; or to become as strong as the West by using its technology. From 1868 on, under Emperor Meiji, Japan took the second path. Meiji dispatched emissaries to Europe and the United States to learn about their industries. He also invited British engineers, French jurists, and German military experts to Japan. The countrys modernizing drive wasnt based only on imitation, though: Japan had plenty of experience in certain industries, such as textiles and steel. Unfortunately, Japans military, intoxicated by its growing might, eventually sought to build an empire comparable with the European empire in Africa and the Russian one in Siberia. It had arrived too late, however; colonialism was ending all over the world, and Japans struggle for empire would end in the atomic fire of Hiroshima and the nations defeat by American forces in 1945. This second crisisAmerican victory and occupationproduced a second opening of a different kind: in 1947, Japan adopted an American-influenced constitution and became a democracy, and its society grew more meritocratic and individualistic, discarding all remnants of the former feudalistic order.

Japan also became an economic powerhouse, achieving spectacular double-digit growth rates in the sixties and, as the economy matured, healthy single-digit rates through most of the seventies and eighties. Innovation was ferocious. After the 1973 oil crisis drove up energy prices around the globe, Japanese entrepreneurs pioneered miniaturization in cars and electronics, reducing energy costs and making made in japan an international symbol of excellence. Japanese business practices, deployed most notably in auto manufacturingsuch as Just in Time production, which cut down on waste by supplying parts only when production needed them, and Total Quality Management, which radically improved product standardswere soon all the rage in American business schools and ultimately became the norm in American factories, too. Because we had no other wealth than our human resources, we had no other choice but to manage resources better than other countries did, Kato observes.

This golden age lasted until 1991, when a burst real-estate bubble drove Japan into a deep recession. For two decades, Japan has seen little economic growth. What explains the stagnation? Fumio Hayashi, a disciple of Nobel Prizewinning American economist Edward Prescott, offers one answer: The Japanese economy stopped growing because the Japanese stopped working. Emulating Americans and Europeans, Japanese workers started to take longer vacations and enjoy more leisurely weekends; public-sector employees retired earlier and earlier. The nations industrial production fell in direct proportion to the reduction in working hours, Hayashi notes. The rapid graying of the populationJapanese families rarely bore more than two children, and women, especially educated ones, increasingly chose not to marrydoubtless contributed to the slump, too, because it caused the labor force to shrink, starting in 2005. Just maintaining current levels of national production therefore requires everyone to work harder.

The Japanese governments Keynesian policies have failed to end the slump. Not a year has gone by since 1991 without Japans increasing its public spending, seeking to accelerate growth. Thanks to the spending spree, Japan now has lots of bridges to nowhere and plenty of useless airports, but little growth. (Economic theory isnt the only reason for these projects; many politicians have been indicted for taking bribes related to them.) Imbued with the same Keynesian spirit, Japans central bank brought interest rates down to zero a decade ago and has kept them there in the hope of sparking investment with easy money. This, too, hasnt worked, partly because Japanese firms, when they want to expand, tend to rely on their own resources, not on credit or on Japans modest capital market. Japans so-called lost decades have demonstrated that neither public spending nor loose monetary policy will revive an economy when the incentive to work has vanisheda lesson that the Obama administration has obviously ignored.

The governments profligacy swelled Japans public debt massively over this period. It is now nearly twice the annual GDP, one of the highest ratios in the world, even before March 11. The debt poses a significant challenge, but the fact that Japan presently owes most of the money to itself buys it some time because the citizens who invest their savings in treasury bonds trust their state and dont require a high rate of return. The debt burden thus isnt as frightening as Europes or Americas. Eventually, thoughin a decade, perhaps, as Japans population continues to age and shrinkthe debt will become truly daunting. Japan will have to borrow on the international market, as the U.S. Treasury and the Europeans already do, and pay its foreign creditors higher interest rates. The debt burden will become crushing. Japanese economists have urged the government to attack the debt problem now, before its too late, but the politicians have been unresponsive so far. Former prime minister Shinzo Abe, a conservative, thinks that only a Tea Partytype popular rebellion against government spending can wake up the political class. But such fiscal revolts arent in the Japanese political tradition. Its more likely that Japans taxes, which remain low compared with those in most advanced economies, will go up substantially before expenses come down.

In early 2011, Standard & Poors lowered the credit rating of Japanese bonds. Japan wasnt at great risk for default, but the agency seemed worried by the lack of any effective strategy to reduce the deficit. The dwindling of Japans population, predicted to fall from 127 million today to 100 million by 2046, doesnt help matters. With deficits already massive, how will the country pay for its ever-growing number of pensioners? Japans average life expectancy is now the worlds highest: 86 years for women and 78 for men. In Europe, immigration has offset, to some degree, a similar aging of the population. But Japan would need to allow more than 500,000 workers to immigrate each year to compensate for its demographic changes, and the Japanese adamantly oppose immigration, fearful of disrupting a largely homogeneous culture. Only 1.7 percent of the population is foreign-born, and even those foreignersmostly Filipinos and Chinese who work in low-skill fields as traineesarent allowed to remain for more than three years.

These economic difficulties have left the Japanese unperturbed, probably because never in their history have they had it so good. Life has been comfortable; parents are wealthy enough to spoil their few children; pensions are satisfactory; health care is of high quality; and the government bureaucracy is efficient, at least compared with its counterparts elsewhere in Asia.

Perhaps most surprisingly, the unemployment rate has been 5 percent or under for decades. How can a stagnant economy provide so much work? The answer lies in Japanese culture. Big, well-known companies consider it their duty to offer as many jobs as possible and not to fire anyone. To allow the firms to achieve this ambitious (and obviously uneconomic) goal, workers agree to flexible wages; during downturns, for example, they might not receive bonuses, which for some employees amount to 30 percent of annual income, or they might have their working hours reduced. For the less privilegedthose not working for the leading firmsthousands of small retail shops and services act as a social cushion. Full employment in Japan is less an outcome of economic growth than a social prerequisite, a moral duty for both employer and employee. Everyone works, or pretends to, even when theres not much to do.

In fact, the Japaneseespecially the younger generationlike Japanese life so much that theyve seemingly lost interest in the outside world. It is a clear sign of such complacency that Japanese students no longer feel the need to study abroad, says Naoyuki Agawa, a vice president of Keio University. In 1990, 59,000 Japanese students studied on U.S. campuses; today, just 26,000 do. Their complacency is understandable. After all, a Japanese university degree is usually sufficient for any graduate to get a decent job in one of the leading firms, which provide lifelong employment. Reinforcing the inward-looking attitude among the young, Agawa adds, is other Asians untrammeled admiration. Every year, about 3 million visitors from China, Taiwan, and South Korea flock to Japan, marveling at the luxuriousness of Japanese life. As Chinese columnist Lu Hua wrote in a Beijing magazine, Japan has already achieved what the Chinese seek: a perfect blend of traditional culture, modern amenities, and personal freedom. The Chinese Communist revolution might not have been necessary to modernize his country after all, he muses privately.

Most Japanese are happy with the status quo, moreover, because it has yet to lead to a significant decline in personal income. Though Japans population is shrinking, its GDP has averaged a 1 percent or 2 percent annual increase over the last five years. (A 2 percent increase translates into $800 for a Japanese worker earning the average $40,000 per year; contrast that with the $400 that Chinas gaudier 10 percent annual increase garners for a worker earning the average Chinese income of $4,000.) Japans GDP can grow because its economy is probably the most technologically advanced in the worldand the most innovative. Japanese trademarks no longer dominate the consumer market as they once did, of course: Korean Hyundais are as good as Toyotas, and Apples iPod has rendered the Sony Walkman obsolete. But by shifting its focus from a consumer market to the business-to-business one, Japanese industry has succeeded wildly.

Whenever we use a cell phone, fly in a plane, or even ride a bike, we now consume made in japan components manufactured by hundreds of companies, including many midsize ones with names largely unknown abroad. One-third of the value of a 3G iPhone derives from components made by Japanese companies; only 5 percent comes from China, where cheap labor assembles the device. The invisible film protecting the phones screen, as well as your televisions screen, was manufactured in Japan. One-third of the parts in the soon-to-debut Boeing Dreamliner 787 are made of Japanese-crafted carbon fiber. Nearly all of the worlds nuclear power plants use a reactor molded by Japan Steel Works. Shimano dominates the global market in bicycle gearshifts. The profit margin of these components is often enormous. South Korean, Taiwanese, German, and some American companies are trying to compete, but Japan has kept an edge so far.

This Japanese comparative advantage is the result of a vast amount of money invested in research by the private sector and the ministry of industry, METI, which works closely with private firms. The advantage also grows out of a characteristic Japanese sense of perfection, as well as a century-long tradition of industrial know-how and family-owned manufacturers. We are a nation of engineers, says Kato. We outsource the low-tech activities to China and other countries, but Japan has never deindustrialized the way the Americans did.

The economic impact of March 11 on this advanced economy wont be as severe as some analysts believe. The heavily damaged northeastern region of the country is 200 miles north of Japans industrial center. And reconstruction has already begun, with private and public funds. The bloated public debt will get more bloated still, true, but the Japanese should have sufficient savings to pay for rebuilding, which is likely to increase the economys growth rate slightly over the short term. The bigger problem may be what happens to Japans nuclear program, which has been adding a new reactor every 24 months, generates a full third of the countrys electricity, and has given the country a strong economic edge in energy production, including those exported reactors. Not only could the post-earthquake nuclear crisis dramatically reduce demand for Japanese nuclear know-how; it could lead Japan itself to become more dependent on foreign oil, something that would not bode well for the industrial world as a whole.

Even prior to March, Chinas rise and growing assertiveness had shaken Japans happy, prosperous, inward-looking, slow-growth complacency. We have been in a crisis for 20 years, but we didnt want to acknowledge it, Abe observes. Now China has woken us up! The shock has had a military component. Last October, a Chinese trawler deliberately rammed a Japanese coast-guard ship in disputed waters around Japans Senkaku Island, which China claims. The incident came half a year after the North Korean militarywhich, many Japanese assume, acts in collaboration with Chinatorpedoed a South Korean naval vessel, and one month before North Korea bombed civilians on the South Korean island of Yeonpyeong. Clearly, says Abe, China is testing its neighbors. Also in 2010, the Chinese tested the Japanese in a different way, slowing the sale of rare earth minerals, which are mostly found in China and are indispensable for electronic components.

Japans response, argues Akira Kojima, should be a third great opening. A former columnist for the Nikkei Daily, Japans leading business newspaper, and currently head of the Nikkei Foundation, a think tank, Kojima believes that a graying, inward-looking Japan will not be able to contain the ambitions of our neighborsor meet the competitive economic challenge. But what should such an opening consist of?

For one thing, Kojima says, Japanese students should become more globalized. Few of them speak fluent English, which isnt the case in other Asian countries. Japans big-business organizations, recognizing the need for greater openness, are already offering scholarships for Japanese students to study abroad. The French-Japanese car company Renault-Nissan, meanwhile, has been promoting young non-Japanese executives to senior positions. And two leading logistics firms, Rakuten and Fast Retailing, have even decided that English will be their working language in the future.

Another way to open Japan is to promote its image abroad. One means of doing so is foreign aid, which Japan can dispense in Africa, India, and the Middle East without being accused of neo-imperialism, since the country was never a colonial power there. Culture is also a strategic asset, the government believes. Though it isnt often recognized, Japan is today the worlds second-largest exporter of cultural content after the United States: Japanese movies, comic books, animation, pop music, fashion, food, and design are enjoyed everywhere. Japanese companies are world leaders in software development for video games. Hayao Miyazakis animated films rival Disneys in popularity worldwide. The Japanese architectural firm SANAA designed the New Museum on Manhattans Lower East Side, with boxlike levels rising above the Bowery. This soft power needs constant reinforcement and promotion, says Kazuo Ogoura, president of the Japan Foundation, a branch of the Ministry of Foreign Affairs. Particularly striking is the emergence of manga, the Japanese style of comic book, as a global phenomenon. To explain its popularity, Ogoura points to its frequently antiauthoritarian message: the heroes are usually young people fighting dark authoritarian organizations, a theme that will resonate with freedom-loving kids anywhere.

A more literal kind of opening would be allowing more foreigners to immigrate. The most ardent proponents of greater immigration, including Kato and Kojima, advocate Swiss-style selective immigration, which would increase the number of immigrants working in Japan and let them stay longer, though they would have to obtain work contracts before entering and leave at the expiration of the contracts. But even Kato is skeptical that this modest proposal would help defuse the soon-to-explode pension bomb. None of our weak coalition and short-lived governments will seriously tackle either immigration or the debt, he says. A better alternative is to perceive our graying population as an economic opportunity. All developed nations, he thinks, must find a way to deal with a vast and growing number of dependent people, and Japan is ahead of the curve on this score, developing sophisticated systems that could reduce health-care costs: intelligent homes, for example, wired to monitor movement and body functions and trigger alarms if something seems wrong. Over time, these innovations will become more reliable and a major source of export growth, Kato maintains. Technology could thus solve the pension riddle and attract global consumers at the same time.

Still, such technological fixes go only so far, according to Yoichi Funabashi, Japans most influential columnist and former editor of the prominent center-left newspaper Asahi Shimbun. Good political leadership will also be necessary, not only to ease public debt but also to protect Asiaand the free worldfrom Chinese aggression. For Funabashi, the most promising development on both counts is the Trans-Pacific Partnership (TPP), an entity initiated by Singapore and New Zealand and currently being debated in Japan. The partnership would create a free-trade zone among Pacific Ocean democracies, which would include the United States but not China, at least not until it reforms and becomes a democracy and a good international citizen. Such an agreement would give a jolt to Japans growth, thanks to the countrys innovative industry, and thus lighten the debt burden, as well as check Chinas imperial ambitions and economic bad manners, such as lack of respect for intellectual property.

The TPP enjoys wide support in Japan, including from the nations five leading newspapers, which are usually at loggerheads. If political leaders could get their act together and sign on to the TPP, Funabashi believes, Japan would become the partnerships axis. In a nation where newspaper columnists are usually more respected than prime ministers, Funabashi bets on the TPPs success. And if China continues to act aggressively, a partnership will be even more likely. Such aggression will also encourage stronger coordination among the powerful South Korean and Japanese navies. (Japans military is far better equipped than Chinas, at least for now. China has yet to launch its first aircraft carrier, which is scheduled to embark in 2013; Japan already has several helicopter carriers in action. And Japans military cooperates closely with Americas, which has permanent bases in Japana presence that the Japanese now mostly accept.)

Despite his worries about China, Funabashi strongly supports a policy of Japans engagement with its historical rivaland he doesnt think that Japanese citizens should wait until their government makes the first move. Business and citizen groups in Japan, he says, should start working with their Chinese counterparts. Asia will stand a better chance of becoming a peaceful free-trade area, comparable with the European Union, when such contacts proliferate.

When I visited Japan earlier this year, a few weeks before the earthquake struck, I tried to guess whether the countrys reclusive younger generation would find such an expansive, outward-looking vision appealing. Most younger people I observed were busy playing video games on tablet computers. Some, called otaku, reportedly live in virtual worlds, connecting exclusively with others who share the same passion. They look pathologically dysfunctional. But who knows? They might wind up inventing the next Facebook.

For all their fascination with the digital world, the Japanese still read books, and three best-selling titles among younger readers suggest an answer to the question of openness. A recent hit, believe it or not, is a collection of Friedrich Nietzsches aphorisms, with more than 2 million copies sold. Literary critic Akiyama Yasuo says that young readers hope to discover happiness by resisting the still-heavy pressure of parents and community in Japans daily lifeapparently with the help of Nietzsche, perceived as the ultimate individualist! A second hit book is more predictable: Peter Drucker on management. The Californian business guru has always been a star in Japan. (Be happy with Nietzsche and make money with Drucker?) And the third book, The Art of Simplicity, is by Dominique Loreau, a French author living in Japan who appears fond of Zen philosophy.

Of course, one could attribute Loreaus success to nostalgia for an old, unopened, pre-Perry Japan. But the young Japanese, fascinated by three foreign authors, may be more globalized than they think. Since March 11, the worlds gaze has again focused on Japan; perhaps the Japanese are beginning to watch back.

Guy Sorman, a City Journal contributing editor, is the author of Economics Does Not Lie and many other books.

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